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Technical Analysis for Trades
What types of analyses do STT users lean towards in their trading? So far, the answer is technical analysis for trades. But, we’ll break it down for you. You asked and we listened:
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One of our users recently contacted us, asking if we could conduct a survey of fellow users to determine what the majority base their trades on, out of the following categories:
- Fundamental analysis
- Technical analysis
- Quantitative analysis
- A combination of all
We thought it was a great question, so we conducted the survey over the past week. We’re still conducting it, but so far, these are the results:
So, let’s take each category and break it down further …
Trading Off the News
Based on the preliminary results of our poll, 23% of STT users rely most heavily on the news to pick their stocks and make their trades.
Keep this in mind, though: The news outlets are under constant pressure to churn out news, so it’s not as fresh as it seems. They are regurgitating stuff constantly and the cut and paste method isn’t always what moves stocks.
The better kind of ‘news’ is usually press releases, earnings reports and earnings calls. This is where we can often see significant movement in a stock price.
If you ask STT’s Tim Bohen, he’ll tell you that news isn’t all it’s cracked up to be. Tim has a technical bias, because hundreds of stocks can have news each day, yet never react.
“Trying to trade stocks with fundamental news but not technical chart breaks will quickly wear you down,” warns Tim.
“The screeners I run all day, every day, look for price and volume movement—both of which are very efficient for locating moving stocks. Trying to read and analyze EVERY news or earnings report will use up all of your time and you won’t get very far.”
Trading on Technical Analysis
Technical analysis is studying the market itself—big picture—using some indicators that might seem a bit daunting to those of you who aren’t technical at all.
Some of the key indicators include (but there are many others):
- Accumulation / Distribution Line: Whether money is flowing into or out of a security. An upward sloping line usually indicates money flowing in. This one can run close to the stock movement itself, but it’s a great indicator for traders because it tends right before the stock.
- MACD (Moving-Average Convergence/Divergence line): One of the most popular indicators, the MACD signals the trend and the momentum of a stock. It compares short-term and long-term momentum, which gives us a good idea of future direction.
- Head and Shoulders Pattern: This is a chart pattern technical analysts love to look out for, because it indicates trend reversal. It’s the pattern you get when a stock rises to a peak from its first ‘shoulder’, then falls, then rises again (this time above its prior peak, forming the ‘head’), then falls back down below the first ‘shoulder’ before rising against to even shoulder level.
- GAPS: This is what happens when a stock opens significantly higher or lower than its previous closing price and it usually happens when news comes out in non-market hours (like earnings reports).
- Double Tops/Double Bottoms: This chart pattern indicates a changing trend that is either a double top or a double bottom. If a stock twice tests a specific price level and hits resistance both times, it’s a double top. If it falls twice to a specific price level and finds support both times, it’s a double bottom, which usually means the stock is getting ready to go higher, while the double top usually means we’ll see some selling off.
Trading off these technical indicators is the most popular method among STT users, based on preliminary polling information. The same is true for STT’s Tim Bohen.
“I locate all stocks based on technical analysis, but then I take the catalysts into consideration,” says Tim.
“I LOVE stocks with a catalyst, whether it’s earnings, contract wins or other fundamental events. I consider fundamentals ‘force multipliers’ for strong technical stocks.
Trading off Fundamentals
While technicals and fundamentals are entirely different ball games, they are both important, and much more important than the news in general.
With fundamental analysis, we’re getting deep into the financials of a specific company we’re interested in. That includes everything that could affect the stock’s value, from macro/micro economics to management, planning and everything else in between.
Only 18% of our users polled so far rely on fundamental analysis to trade and Tim himself weights it at around 20% of his data force.
Trading on Quantitative Analysis
Quantitative analysis was the least common method used by traders, our poll found, with only 9 percent—or fewer than 100 traders out of the over 1,000 we polled, preferring that method.
Although it’s not the most popular kid on the block, this method shouldn’t be dismissed—it has some positive qualities, mainly that it’s black and white: it’s all about the numbers. It also has some not-so-great qualities–mainly, that it involves a lot of math and, if you hate math, this probably isn’t the method for you. And, when we say math, we mean stochastic calculus…)
What is quantitative analysis, anyway?
Let’s look first at what it is not. It’s not about the company. It’s not about who’s running the company. Quantitative analysis doesn’t concern itself with company research or which products a company sells. Instead, quantitative analysis concerns itself with establishing patterns, and modeling those patterns to predict future price movements in stocks. Quantitative analysis seeks to establish patterns between price movements and trading volumes, or earnings forecasts, revenues, market share, earning surprises, or whatever other factor might correlate to price. It’s a mathematical way of looking at how publicly available data relates to the price.
Here’s why we still like quantitative analysis: it’s a dispassionate exercise without bias and we love trading emotion-free. It’s about numbers, plain and simple (although that doesn’t mean it’s fool-proof). If the numbers merit a buy or a sell order, the order is executed. If not, the trader moves on. No muss, no fuss.
But, we still like technical analysis for trades best. So does Tim.
“I do think it is best to be technical first. The ratio may be slightly different for many, but I see many new traders trying to ‘trade the news’ on a stock that has very low volume and price movement. Remember: only price pays. So, put price first and fundamentals second,” says Tim Bohen.